With this bit of background, it goes without saying that I very rarely agree with TJN.

But just as a stopped clock is right twice daily, the Tax Justice Network on rare occasions will produce some worthwhile research. For example, here are some passages from my article in the latest issue of the Cayman Financial Review (where I’m a member of the Editorial Board).

…would anybody, if asked to list the world’s 10 biggest tax havens, put together a list that includes Germany, Japan and the United States? Sounds absurd, but that’s precisely what the ideologues at the Tax Justice Network (TJN) asserted in the Financial Secrecy Index (FSI) released last November. …To be fair, though, the methodological approach used in the FSI report is not wholly objectionable. The TJN is seeking to come up with a measure that combines both the degree to which a jurisdiction has “secrecy” laws and the extent to which that jurisdiction attracts global capital. In other words, the TJN’s philosophical leanings are extreme and the organization obviously is motivated by a desire to hinder tax competition and fiscal sovereignty, but the FSI report provides an interesting way of seeing which so-called tax havens play the biggest role in the world economy.

And one of the biggest tax havens – number 6 according to TJN – is the United States.

I have no objection to their choice.

It makes sense to include the United States because there are several attractive policies for global investors, including the non-taxation and non-reporting of certain types of capital income. Moreover, several states have very friendly incorporation laws.

When I’m talking about “friendly incorporation laws,” I’m referring to the fact that states such as Delaware, Nevada, Wyoming, and others make it easy for everyone – particularly foreigners – to set up companies. This is a good thing for business and investment, but it irks statists because many American states don’t require the collection and sharing of information that foreign governments want for purposes of enforcing bad tax law.

So the United States is a de facto tax haven.

But that’s just part of the story. When I discuss the “non-taxation and non-reporting of certain types of capital income,” I’m referring to the fact that the internal revenue code generally does not impose tax on interest and capital gains paid to foreigners (specifically nonresident aliens). And because we don’t tax those payments, there’s no requirement to report that information to any government. As you can imagine, this irks the left because it means there’s no information to share with foreign governments that want to track – and tax – flight capital.

To reiterate, this makes the United States is a de facto tax haven.

These laws are extremely beneficial to the American economy. To get an idea of why the United States is a big winner from being a “tax haven,” look at this chart showing historical data on the amount of money foreigners have invested in stocks, bonds, and other forms of indirect (sometimes called passive) investment in America.

By any standard, $13 trillion is a lot of money. Those funds boost our financial markets, enable job creation, and increase economic performance. We don’t know how much of that money is invested in the United States because we have a friendly and confidential tax system for nonresident aliens, but it surely helps to explain why there’s so much foreign investment in America.

Let’s be thankful that the United States is a so-called tax haven. Those pro-growth policies help to offset Obama’s bad policies. Indeed, two Canadian economists found that tax havens actually are economically beneficial for high-tax nations.

But that’s not the moral of the story. Yes, I like that America is a tax haven for foreigners, but the real moral of the story is that we should apply the same good policies to Americans.

Let’s get rid of the corrupt internal revenue code and adopt a simple and fair flat tax. That means a low tax rate, of course, but it also means no double taxation of income that is saved and invested.

Which means Americans would get the same pro-growth treatment now reserved for foreigners.

For more information, here’s my video on the economic argument for tax havens.

Getting rid of double taxation will have a huge positive impact on investment in the US. However, the politics for doing so seem insurmountable.

I propose to get around political roadblocks with a “painless” tax.

For this discussion, let’s assume that all capital gains and dividends are currently taxed at 20%.

If the capital gains tax is abolished, the value of stock should go up by 25%, since investors would then own 100% of the proceeds rather than 80%.

The day before the tax is abolished, there could be a one-time “painless” tax of 20% on all accumulated capital gains. Note that only those with zero cost “founder’s stock” would need to pay as much in taxes as the gain in value of the stock.

There could also be a second “painless” layer. The one-time “painless” tax could be paid by reducing future Social Security payments by the tax amount. There would be no cash flow impact on those with modest portfolios and the wealthy could sell some of the appreciated stock into increased demand.

Those with non-Roth portfolios would also be taxed at a reduced rate, and they would have no future tax burden remaining.

This would reduce our Entitlement overhang in a more ethical way than cutting benefits for the “wealthy”, while at the same time providing some cash to pay for transition costs (terminated bureaucrats) in moving to a Flat Tax.

Note that a Flat Tax on earned income is also a consumption tax. The biggest difference is when and where the tax is applied, but in both cases it is the consumer that ultimately pays the tax.

A Flat Tax, whether it be on income or sales is definitely the way to go. However, both types of Flat Tax have problems and it would be much better to use a hybrid approach. If correctly structured such a hybrid approach would have only those with business income filing taxes. Withholding on income would be a the flat rate and therefore accurate.

It’s time that we stop battling between Flat Tax camps and consolidate our efforts. It is no longer good enough to say that we like the Flat Tax but are agnostic as to income or sales versions.

We will need some form of “prebate” to make effective tax rates progressive, while maintaining modest top marginal rates for all, including as tax equivalents lost means-tested benefits. The FairTax without modifications has serious “cost-push” inflationary problems that relate to gross salaries not being reduced to net salary levels. And, the list of “exemptions” will grow, food being a primary example.

Yes, but even just switching to a consumption tax will allow a significant triple taxation of income that is already in the pipeline: income that was already double taxed with the current system, and will be taxed once more at consumption. There are several trillion in this calculation hence its appeal to politicians. But eventually, the pipeline will clear, and savers will get one more lesson that if you save methods will be easily found to milk your postponed gratification. I guess we have too much saving, so we need to clamp down on it ??!!?

“Those capable of contributing according to ability, please register for community service. Community service is set to 10 hrs per week for mediocre persons and 24hrs per week for more competent citizens, in order to finance a government consuming and redistributing 55% of GDP.”

….

“Too few have registered for the community service program. Therefore all citizens are required to declare abilities on form CS172 so that better plans can be drawn for supporting sectors in greater need. ”

….

“Too few citizens declared abilities and the country is in trouble as it is been overtaken by jurisdictions less corrosive to personal motivation. So now the people are desperate and angry pitchforks are starting to show up in the streets. We are thus making the community service hours mandatory and increasing hours to 30 per week, until the crisis is behind us”.

….

“Unfortunately production from the 30 weekly hours of community service has been rather dismal, the country’s growth rate compared to the rest of the world continues to diverge and competent people whose wealth was gradually consumed are now resorting to the despicable act of emigration. We are therefore declaring emigration an unpatriotic treacherous act in these difficult times, and subjecting all emigrants to confiscation of property. Relatives who allow family members to commit emigration are also partially responsible and those actually encouraging or facilitating emigration of competent relatives will be forever cut off from their deserting kin. We hope this finally works, otherwise we’ll have to resort sending uncooperative citizens to Novaya Zemlya. ”

…

Once, I had a dream… I was a voter-lemming… I believed in perpetual motion machines. Paul Krugman (the Jim Jones of economics) had assured me that they do exist…

Regarding the argument that the wealthy would “pay no taxes”, if investment taxes were abolished:

It would be impossible for the wealthy to avoid consumption taxes. Obviously when they personally consume they would pay tax. Investment just shifts the consumption time frame, while stimulating growth.

However, when they do invest, they also pay taxes indirectly. Equipment and facility purchases would have taxes embedded with a flat tax on income (but not necessarily on sales). Start-up salaries paid pre-production, which could not have been paid without their investment, would in turn be taxed as income and then used by new employees to consume.

If a wealthy person only produces, becomes wealthy, and then never consumes then he/she is not really wealthy. He simply produces a lot and enjoys no more than the mediocre next door. The only benefit he gets is possibly passing the wealth over to his descendants. But if they also do not consume, then you have a series of suckers who simply work all their lives and enjoy little. Actually, that type of rich person is the wet dream of HopNChange. Someone who only offers his work and never consumes. The fact that he pays no taxes is quite secondary, and it is ridiculous to be worried about that. You got the human bee who works for your society and asks nothing in return and leftists worry that he’s paying no taxes? Such a person actually pays 100% taxes. ALL his effort goes to serving society, he asks for nothing in return. ALL his effort is de-facto redistributed to others to — to create business activity for others.

Great note Dan, and chart — except for tiny typo. Left axis is “$millions”, not “$billions” — 1,000 million is a billion; 1,000,000 million is a trillion; 1,000,000 billion is quadrillion, and we haven’t had such hyperinflation in the USA to make us a 14 quadrillion economy.

[…] economic performance. Moreover, it’s very difficult to factor in the economic impact of America’s tax-haven policies for foreign investors, which help offset the damage of high tax burdens on American […]

[…] Big European nations such as Luxembourg and Switzerland were left off the blacklist, and the United States also was omitted (though the EU figured it was okay to pick on the U.S. Virgin Islands for […]